Analysing the relationship between spot and futures prices in Australian electricity markets

Purpose: This paper is intended to thoroughly investigate futures premiums in Australian electricity markets. Originality: This paper is the first comprehensive study to investigate futures premiums in Australian electricity markets. Key literature / theoretical perspective: Due to the non-storability of electricity and the extremely volatile behaviour of electricity spot prices, market participants hedge their risks by buying or selling electricity in the forward market. The ex-post futures premium as the relationship between quoted futures and realized spot prices provides important information on the risk-aversion of market participants. Design/methodology/approach: We examine the magnitude of futures premiums at different time instances. We relate the observed futures premiums to the behaviour of electricity spot prices. Findings: We find economically and statistically significant positive ex-post futures premium for futures contracts. We find that the bias in the futures price increases (decreases) when the last period average spot price increases (decreases). Research limitations/implications: Dynamics and the dependence structure between the observed risk premiums should be analysed more deeply. Practical and Social implications: • Buyers and retailers of electricity are risk averse. • Risk premiums are significantly related across regional markets.